7 Feb 2012

Insurance vs membership

When you buy fire insurance, you pay a monthly fee in case your house burns down. You may "make money" if it does, but few people want that. You pay to offset the bad consequences of a fire.

When you buy a gym membership, you pay a monthly fee for unlimited access to facilities. You "get your money's worth" if you go a lot, so there's an incentive to do so. You pay to get as much exercise as possible.

These differences clarify why people misunderstand "health insurance." It's supposed to be there to take care of you in an accident, but a lot of people try to get their money's worth by using it like a membership. That's why healthcare costs (and insurance costs) are rising [previous post with details].

In the Netherlands, I am required to buy (private) health insurance, but it only covers accidents. Most routine treatments cost money, so I don't get them unless it's worth paying €80 ($100). That's why health care costs less in the Netherlands than in the US.

Bottom Line: Use the right instrument for the right problem (incentives matter).

6 comments:

However, in the Netherlands a lot of financial stuff goes on behind your back with agreements between doctors and health insurances about their invoices. This means that clients and patients have no insight in the costs until they receive a bill which the insurance has paid for them without asking or approval from the clients and without inquiring whether the bill should be paid at all. The insurances refuse to send a copy of the doctor's bill as "this all goes electronically" according to SIZ and VGZ. So, you cannot make a decision about whether to go based on finances: in advance it is totally unclear what the costs will be, and the insurances sue you if you do not pay them immediately.I would rather pay the doctors myself directly. Then I know what I got, and what I have to pay for that. And it saves _a lot_ on overhead and head aches! (Some vicious circle dooms up here...)

Additionally, who is telling you that memberships lead to higher uses? Do you really believe that all those members of gyms go there more frequently just because of "unlimited access"? Several studies indicate that most gym members don't use the possibilities for which they're paying. So, how do you make the conclusion that America's health problems are linked to unlimited access?Is it not rather the unhealthy lifestyle/food/television/cars/non-preventive-care which lead to high health costs in the USA?p.s. why are economists always looking for the silver-bullet-solution???

I don't want to get into a health care discussion here but I don't agree with Mr. X. In short, if all doctors or medical providers would send customers the bill and had to keep tracking all that, it would create much more overhead on the side of the 'doctors'. Next to this, it would almost be impossible for customers to figure out medical bills with all these terms. Insurance companies don't want to overpay so they are better off verifying costs than the average citizen is (who doesn't understand what is normal for a certain operatoin).

Back on topic, I think it is indeed better to work with an economic stimuli to discourage use. Let people pay for certain things, or a part of it to keep the general healthcare costs lower. The same goes for the pricing of water of course, versus the free water due to water rights.

But if less people would go to doctors, what impact would it have?1. of course, costs would reduce in the first place because less people would visit doctors. Ok, we agree on that point!2. however, what happens if people visit less frequently their doctors? They probably neglect their illnesses, since they have an incentive to visit their doctors less. What happens if they neglect illnesses? of course, the illnesses become worse and they will eventually visit the hospital instead (once it is almost too late)! And believe me, a hospital stay and an operation cost far more than just 90$!p.s. the same is true for water! give people an incentive to use and drink less water has tremendous negative impacts on health!

As one who has lived in NL and had my 4th child there, I can tell you another reasons health care costs are low: different service levels (you get what you pay for).

- Antibiotics are prescribed rarely. Lowest rate in developed world. See this: http://www.economist.com/node/18483671 . If you have strep throat, you wont get drugs, it'll go away eventually.

- Many many more births at home, with midwife support vs Dr. See If you have a baby in the hospital, you'll often be discharged in a matter of hours, not days. See this: http://www.economist.com/node/18483775

Underlying both of these: Pareto principle- 80/20 thinking. They accept some risks and they avoid a lot of spending

@Mr X -- Insurance companies definitely know more than patients and cash *is* better, but you DO need insurance for BIG problems. Since the company will pay for them, they have an incentive to keep costs down -- and the purchasing power to do so.

@Unknown1 -- gyms *count* on you using less than your full schedule. Lifestyle also matters, but that's partially the fault of unlimited access (not paying for your mistakes). I am not sure where you got "silver bullet" from my post -- I was making an observation of the direction where we should go, not proposing a blanket system (but I can do that too...)

@Anonymous -- agreed.

@Unknown2 -- your points are somewhat true but "expensive water," e.g., is not going to result in dehydration deaths as much as less lawn irrigation (safe for care). You need to consider the possibility of a middle ground,not all or nothing...

@mac -- get what you pay for indeed. Adam Smith proposed that there was no limit to demand, "except by the width of a man's stomach," and THAT limit has surely been pushed over the past 240 years... :-\